Rally’s, Checkers Call Off Merger Backed by CKE

Deal-maker William P. Foley II’s fast-track plan to build a national restaurant company around his Carl’s Jr. chain hit a speed bump on Monday when Rally’s Hamburgers Inc. and Checkers Drive-In Restaurants Inc. abandoned a planned merger.

The two companies dropped their previously announced merger after determining that the Securities and Exchange Commission planned to subject the deal to accounting methods that would cause “financial problems,” the companies said.

“It was aborted because the earnings benefit we would have gained from doing the transaction would have been offset . . . by the accounting treatment that the SEC was leaning toward,” said Donald E. Doyle, president and chief executive of Louisville, Ky.-based Rally’s.

The deal had been championed by Foley, chairman and chief executive of Anaheim-based CKE Restaurants Inc., operator of the Carl’s Jr. chain. CKE also has an equity position in Rally’s and Checkers.

“I wouldn’t say this is a setback,” Foley said. “Both [Rally’s and Checkers] are making headway, and they’ll both continue to make gains as independent companies,” Foley said. “So this is something we can revisit in the future if we want to.”

Restaurant industry analysts said that the failed merger should have only a minor impact on CKE’s expansion plans. The Anaheim chain’s planned acquisition of Hardee’s Food Systems Inc., which has 3,152 locations in eastern states, is a more ambitious undertaking for CKE, which operates 678 Carl’s Jr. restaurants in western states.

“The real issue for CKE long-term is its deal with [Hardee’s],” said Mark Sheridan, a New Orleans-based analyst with Johnson Rice & Co. “That’s where Carl’s Jr. has its huge opportunity to expand.”

Checkers’ merger with Rally’s would have created a company with $327.8 million in revenue and 849 double drive-through burger restaurants in the East and South. Both chains have been struggling to turn a profit but have made gains in recent quarters after CKE executives began working on their operations.

Clearwater, Fla.-based Checkers said Monday that Foley, who already serves as chairman of CKE and Irvine-based Fidelity National Financial Inc., has been named chairman.

Foley, who had been on Checkers’ board, succeeds Frederick Fisher, who will remain on the board. Tom Thompson, CKE’s president, already serves as Checkers’ vice chairman and chief executive. CKE Senior Vice President Joseph Stein serves as Checkers’ executive vice president.

Previously, CKE acquired acquired a 10% stake in Checkers, along with $35.8 million in Checkers’ debt. CKE also holds stock warrants that, if exercised, would boost its ownership stake to 22%.

In related SEC filings Monday, CKE provided more details about its planned acquisition of Rocky Mount, N.C.-based Hardee’s, the nation’s fourth-largest burger chain behind McDonald’s Inc., Burger King Corp. and Wendy’s International.

CKE said it plans to offer 8.3 million shares of CKE common stock in a secondary offering that is designed to raise $184.5 million in cash to help pay for Hardee’s. CKE said it would borrow remaining funds needed to complete the deal.

The Anaheim-based company also said that CKE Executive Vice President Rory J. Murphy would take over as president and chief operating officer of the Hardee’s chain when the deal is completed later this year. Murphy will succeed H. Stephen McManus, Hardee’s current president and chief operating officer.

CKE intends to close up to 114 under-performing Hardee’s restaurants that had combined operating losses of $12.9 million in 1996. CKE hopes to sell those poorly performing locations to a third party.

While the struggling Hardee’s chain has a strong breakfast menu, its lunch and dinner business has stalled. CKE said it hopes to bolster Hardee’s business by adding the burger-based menu now found at Carl’s Jr. restaurants.

CKE’s share price rose by 12.5 cents to $27.875 on Monday in New York Stock Exchange trading. Rally’s shares fell by 25 cents to $2.625, and Checkers’ shares rose by 6.25 cents to close at $1.188. Both stocks trade on the Nasdaq market.